Public Bill Committee

[David Taylor in the Chair]

The Committee deliberated in private.

On resuming

David Taylor: I remind Members and witnesses that we are bound by the deadline that we agreed this morning, which means that todays sitting must end by 6.30 pm at the latest. If necessary, I shall interrupt Members or witnesses in mid-sentence.
We shall now hear evidence from Helen Banks of the British Bankers Association; Adrian Coles of the Building Societies Association; Mark Lyonette of the Association of British Credit Unions Ltd, Alan Cook of Post Office Ltd; and Kevin Seller, head of Government services for Post Office Ltd. You are most welcome. We are grateful that you have given us your time and experience this afternoon. We look forward to hearing your evidence.
First, I ask you all to say a couple of sentences about yourselves, so that we know what your involvement with the legislation might be.

Helen Banks: Good afternoon, Mr. Chairman. I am Helen Banks from the British Bankers Association. I am a director on its retail team, with specific responsibility for financial inclusion and financial capability matters among others. I have seen the Bill through its consultation stages.

Adrian Coles: I am Adrian Coles, director general of the Building Societies Association. We represent the mutual building societies in the UK. They have a good record in promoting the individual savings account and the Child Trust Fund. We therefore have a natural interest in the legislation.

Mark Lyonette: I am Mark Lyonette, chief executive of ABCUL, the credit union trade association. The 500 credit unions have just over £600 million in savings, some of which will obviously be for people in exactly this target audience.

Alan Cook: I am Alan Cook, managing director of Post Office Ltd. As you may well know, we have 11,500 branches and a growing aspiration to be a key player in the financial services market and, in particular, to make a worthwhile contribution to the financial inclusion agenda for this country, in which this account appears to play a part.

Kevin Seller: I am Kevin Seller, head of Government services for the Post Office, so I have been engaged in conversations with the Treasury so far in terms of the role that I hope the Post Office will play in developing these accounts and offering them to citizens.

David Taylor: We shall open with questions. First, we shall ask about provision of services, sales and interest. It will help our witnesses and me as your Chairman if you indicate whether the question is aimed at a specific person or is open to the whole panel. I shall ask Mark Hoban to start.

Q49 Mr. Mark Hoban (Fareham) (Con): This question is for all of you. We heard this morning about why the saving gateway product is attractive to potential savers. There may be demand out there, but will there be supply? I think that so far only the Post Office has indicated that it intends to provide a saving gateway account. Can you say, from your various organisational perspectives, where you see the costs arising on the gateway accounts and how attractive they are for the bodies that you represent? Perhaps we can start with Helen and then work our way along the panel.

Helen Banks: First, there is a fundamental objective of providing a savings facility to people on a low income, and the banks have certainly supported that as part of our overall financial inclusion agenda. You are talking about the specifics and how the product might work in terms of cost of provision. It is fair to say that it will come at a cost. A lot of the work that we have been doing has been about trying to make it as economically viable a product as possible. The benefits to the banking members who decided to provide it would be around reputation, rather than a commercial product earning a particular return for the banks.

Adrian Coles: Certainly some building societies will offer this product, but not all of them. Those who are inclined not to offer the productof course, we do not know until we have seen the full set of regulationstend to say that the market will be small and the costs will be high. We know that the maximum estimated size of the market is £260 million. That is about 0.6 per cent. of the flow of new deposits in 2007, yet some aspectsthe requirement to give statements, the transfer of accounts between different types of institution during the two-year period, the requirement to provide information to Her Majestys Revenue and Customs and so oncould lead to significant costs on fairly low-balance products, so for many societies, the jury is out.
I am certain that some societies are sympathetic to the product and will want to offer it, but others, in the current environment of low profitability, low margins, difficulties in the mortgage market and very low interest rates, may decide to stay out of the market.

Mark Lyonette: Many of our members would be very keen to offer the account. We may not have some of the same systems costs as banks and building societies in terms of development of banking platforms, but we see the cost of collection as quite significant, in so far as our members would want to encourage take-up, we would try to move away from cash collection and make use of the more cost-efficient ways that we have of collecting money from people on low incomes. We will look to make have payroll deduction agreements with employers of people on low wages. Similarly, for people who are paying their benefit into the credit union, we would look to have deductions from benefit, because even with our cost structure, which obviously is very different from that of Adrians and Helens members, we cannot look to make this work on cash collection. The cost of collection is not sustainable, in our view.
We also think that the mechanisms for deducting from peoples wages and benefits have another advantage, which is that they are incredibly convenient. One of the things that the credit unions have learned over the years is that savings are not just about return. Convenience also encourages saving. It is also aboutthis is particularly important in current timesperception of safety. To get people to part with their savings, you need those three things. Convenience is key, not just the 50p match, so we will look to partner more with larger employersin fact, with all ranges of employers. We want to see if we can collect savings in a way that is very easy for peoplelike falling off a log, is how we like to describe itand to make it as cheap as possible for the providers and credit unions.

Alan Cook: The Post Office has been very clear that we would be keen to participate in this initiative. As I said in my introductory remarks, this goes to the heart of the Post Offices role in terms of financial inclusion. We have the best part of 4 million customers still collecting benefits in cash from post offices. We think that 1.5 million of those are probably eligible for a saving gateway product in their own right. We are actually paying the benefit in cash over the counter.
I would not, though, want to trivialise the cost issue. I might lie somewhere between ABCUL and the banks. I would need to find a partner to provide the administrative capability and would pay that partner to do the work. That partner might well belong to one of the other associations at this table. The economics are there and need to be tackled. The Post Office believes that it would be a good thing to do, and that we need to find a way to make it work. We would expect, probably, to take a significant market share of the accounts, which would of course make it easier.

Q 50

Mark Hoban: I want to follow up on a couple of points that have been made. First, Helen, you talked about some of the things that you would like to happen to reduce the cost. Could you go into a bit more detail about what you would like to see in legislation to reduce the cost to banks in providing the accounts? I guess that that question applies to all of you.

Helen Banks: Yes, of course. The Bill has already taken into account a number of the views that we expressed on the early proposals. It is important to say that we have been working with the Treasury for some time on this. We had some issues with the complexity of matching or maturity payments, for example.
In terms of where we sit now, our members remain concerned about one or two key issues. At the top of the list is transferability and the complexity that it will add to systems developments. The transfer process will probably have to be a manual workaround, and, of course, those are always more costly than automated systems. That angle is slightly complicated by the need to provide the history of an account in order for the new provider to do the maturity calculations at the correct time and to include such information in statements and so on, which would be passed from one provider to another. That is one of our key concerns about complexity.
Other questions remain about the regularity of statements and the information required in them, for example. At the moment, we are talking about a six-monthly statement, which I think is fairly widely accepted. However, if prescription of information required in the statement is particularly onerous, an additional systems build, and therefore more cost, would result. Anything where we have to develop systems comes at a cost, frankly.

Adrian Coles: I agree with all of that, but is there a requirement for six-monthly statements? Let us suppose that you offer a passbook account, in which customers have in their hand, any time that they want to look at it, a statement recording all their payments. Why then force the savings provider to go to the trouble of posting an additional statement? Again, that would be too prescriptive. One or two things can be left to the discretion of the customer and the institution, without being in the regulations.

Q 51

Mark Hoban: Alan, it sounds like you have gone the furthest in looking at this, and yours is the only body to have expressed an interest. What share of the market do you think that the Post Office would need to make the operation economically viable?

Alan Cook: That is a tricky question to answer, because it is not yet clear to me how it can be economically viablefull stop. If we obtain a larger market share, it is easier to produce a justification for doing it. I can only really look at this in the context of broader financial inclusion, of which this is a component. If I ask it to stand up in its own right, what you are hearing from the other witnesses is that it is quite tough. There is quite a lot of administration running off very small average balances, which makes it difficult to make the thing pay.

Q 52

Mark Hoban: Are we in danger of repeating the mistake made with Santa products, which were low-cost, simple products that were not attractive to providers to retail?

Alan Cook: That is the potential risk. If there is over-prescription, you will introduce extra costs. We do business in different ways with our customers, and we should allow the organisations to play to their strengths. Our strength is face to face, for example, as Mr. Lyonettes would be, although he may be working for employers, from what I hear. Mr. Coles already made the point that there is a tendency to have a passbook, for instance, for building society accounts and other assets. If we are very prescriptive, we will force everyone to do things in exactly the same way, and it will rise to the highest average cost if we are not careful. The fundamental problem with all financial inclusion initiatives is that the average amount of money handled will be quite small, and the cost is not really any less just because it is a small amount of money.

Mark Lyonette: Even we are looking, to some extent, for hidden subsidies, although not Government cash. We have worked a lot with the social landlord sector, and they are very keen on it. The Chartered Institute of Housing did a big report on savings with rent, a point at which people are parting with money anyway; a small amount can be added if they agree to do so. We may be looking for social landlords to do some of that collection business for us. They are doing that not because the Government or the customer will pay them but because they have an interestpresumably often a strong business interestin the wider financial inclusion agenda.
There may be other people who can play a part who are not necessarily making it stack up on an incremental basis. From our perspective, we probably have a slightly different incentive from Adrian and Helens members. We can mitigate some of the costs because it attracts customers that we would like to serve. In so far as that substitutes for some of the costs of acquisition, it is beneficial to us.

Kevin Seller: I would only add that, as Alan said, our advantage is that we have a lot of face-to-face contact with those customers, so I do not think that attracting them will be an issue for us. Our concern is that we might get an awfully large number of them and exceed the Treasurys wildest expectations in terms of take-up.

Q 53

Edward Timpson: On the back of those remarks, we heard evidence this morning from the Institute for Fiscal Studies and other bodies that they were looking at more of a one-size-fits-all, non-competitive product that would be the same wherever people went, yet we hear that you want more discretion over how you package the product. How far do you mean to go with that? Is the Bills basic premise of 50p saving in the pound, for example, a sacrosanct element to which you would adhere? Are you referring more to the administrative nature of the product when you talk about discretion?

Adrian Coles: Yes, we are talking much more about the behind-the-scenes operation of the account, which is not really relevant for the customer. Obviously, building societies will not say, Were going to pay 60p matching when others are getting 50p matching from the Government.

Helen Banks: It is about having common features recognisable by the consumer as being saving gateway scheme features. Those would then be provided within providers existing framework.

Q 54

Stephen Ladyman: In your first answers, you all seem to reflect the accounts as a product from which you hope to make money, or at least not to lose it. None of you seems to factor in the business expansion premise behind them. If we take Adrians estimate of a market of £265 million, that is 500,000 new savers a year at worst. The Governments figure is that 8 million people might start saving for the first time. Is there not a benefit to all of you in the fact that we are starting to inculcate the saving process in a huge number of people, from whom you can make money in future years? If you have thought about that, have you tried to quantify what that might mean to you?

Adrian Coles: Yes. Those building societies that are more enthusiastic about thisthere is a difference of view among societies, as I saidwill certainly see it as part of the marketing function. I hope that they would retain the customers. There is a facility to switch the balance saved into an ISA, which is very welcome. We are very active in the ISA markets, and we certainly hope to be able to build on that. On the other hand, you may get lots of people saving for two years, taking the bonus and never being seen again. It is very difficult to judge what percentage of customers will do each of those two things.

Mark Lyonette: Yes, it is very much part of something that we see as mitigating the costs of delivery. From our perspective, many of the people who would take this up may also be future borrowers from credit unions. That might play differently for banks and building societies, in terms of the prospect that they see, but we do not see this as the only source of income, potentially, from these customers. They could become very valuable customers in every sense to us over the years.

Helen Banks: From a banking perspective, we already work actively within this particular sector through provision of basic bank accounts. We continue to open something like 50,000 basic bank accounts every month across the piece. The saving gateway account very much sits in that area. The problem with estimating future return is that it is difficult to do not knowing the market share or exactly what will be the take-up of other accounts or products at the end of the two-year period, but certainly that is something that banks are looking athow could people be encouraged to take on other products and to stay within mainstream banking?

Alan Cook: We are giving you four answers to every question, but I feel that I ought to comment on that one. I do not think that I suggested this was a profitable venture. What I said was that this is something that needs to be looked at in the whole. It is part of a financial inclusion offer. Therefore, as a result, when you put that alongside all the other things, you should be able to produce something that is worth while. That is why we committed to it. But the cost will be high in comparison to the amount of money being handled. You will have a relationship with a customer that we probably already have a relationship with anyway. If you then look at it on a marginal basis, you can begin to make a case yourself.

Q 55

Mark Hoban: Can we assume that when an institution decides to offer the saving gateway product, it will be available at all its branches?

Kevin Seller: Certainly that is our intention at the moment.

Mark Lyonette: Yes, I think so.

Adrian Coles: I would have thought so. It would be very odd to offer it at some and not others.

Helen Banks: Yes, that is certainly the way that the banks are looking at it.

Q 56

Siân James: We have strayed into an area that I was keen to develop, and you have already answered some questions that I wanted to ask. Is there not a danger that you will be actively encouraging people to take up your products? We have seen where finance and financial products have been going over the past few years. Will those customers be appropriate? Will they be encouraged to take up products that they may not need, such as credit cards? Do you have any plans not to limit but to help people understand what commitments they are taking on and what dangers they may be facing?

Helen Banks: Certainly in discussion with members, it has become clear that they have been looking very much at how they would help inform and guide customers who came in through this route. We are also active in looking at the developments around the pilot of the pathfinder for money guidance, and how the greater financial education agenda might be used to inform consumers coming through this route. So I do not think that it is, Lets take them on and put them into a product; it is really looking at an all-round service.

Adrian Coles: I cannot see most building societies seeking to sell additional products to this particular group. The main other product that building societies sell is mortgages, and these days the amount that you will save in a saving gateway is not enough for a deposit.

Mark Lyonette: I suppose that I would turn it around. I am not worried about our members irresponsibly lending to them or anything else. I do think, though, that there is an interesting challenge with the saving gateway, around financial education. That is, in our experience it is hard to teach people to save. People seem to value savings only when they have them, which is counterintuitive in terms of financial education. We teach people this and then they go and do that. In our experience, people value it only once they have it, so the challenge with saving, particularly with people on low income, is how we incentivise it and make it like falling off a log. When they have it, they say, Actually, I feel much more confident now. I have a couple of hundred pounds savedan emergency buffer. We see that all the time: it is not the economic value of a couple of hundred pounds, but peoples confidence in their financial health. We see the saving gateway as being much more about how we can all reach that point. It is probably counter-cultural, when the Government are encouraging everybody to spend more, but savings are an important part of the piece in terms of protecting ourselves.

Siân James: It is a good habit, yes.

Alan Cook: Some 24 million people go into post offices every week, and I would hazard a guess that nearly all 8 million people who are the target market in this instance visit the post office every week. We are already talking to and servicing those customers. The existence of the saving gateway will not change our relationship with them, but in so far as it will inculcate a savings habit, one will reach the end of the saving gateway and the money will be paid out, and it would be rather nice to think that the money might roll into something like an ISA and that the savings habit might be established. I guess that that is what the Bill is all about, but it does not change our relationship with the customer, because we are already dealing with them.

Q 57

Siân James: In your original evidence, you both quotedMr Lyonette and yourselfhow many branches you have, and the comparison was quite stark: Mr. Lyonette, you have 500, and Mr. Cook, you have 11,500. Do you intend to grow the credit union network, Mr. Lyonette? You talked eloquently about developing the savings habit, but will your organisation provide enough coverage in comparison with the coverage that the Post Office can offer?

Mark Lyonette: We see this in two parts. We expect to get more than our fair share, because of the size of our sector already, but some things that are currently happening, such as the Governments support for new legislation in the sector, will allow us to work much more closely with employers. I was talking to Alan before, and the measures could allow us to work much more closely with partners such as the Post Office. Some of those things will enable us to play a much bigger role. I do not see there being more credit unions than the current 500, but I see an awful lot more people using them. It is not about the number of institutions, but about how we can reach people and how they can conveniently use credit unions.

Q 58

Stephen Ladyman: The Bill is permissive on the subject of whether the Government should insist on interest being paid. It does not set any amount; it allows that to be set by regulation. Do you have a view about whether you should pay interest on the savings in the accounts, and, if so, what level it might reach?

Helen Banks: I have a view. Commercially, if banks were to be the provider, they would probably prefer not to pay interest on the account. However, there is a rationale. Obviously, one rationale is the economics of it, but it is worth pointing out the danger of confusing the Governments incentivisation through the maturity payment with the return on a normal saving account. It is better, and simpler from the consumers perspective, that they understand that the maturity payment continues throughout the period of the saving gateway account, at which point they will move on to another saving vehicle, where an interest rate would of course be appropriate.

Q 59

Stephen Ladyman: Let me explore that a little more. It was pointed out this morning that if interest is not paid, people begin to think that what the Government add is the interest. When the account finishes, therefore, they may look for the same interest and, when they cannot get it, stop saving. It was suggested that it might be worth paying some interest, so people could at least see the difference between the bonus at the end and the interest.

Helen Banks: It is a point of view that I do not share.

Adrian Coles: The bonus so dwarfs the rate of interest that might be paid in the current environment, with base rates at 1.5 per cent., so I really cannot see how the interest rate will be relevant to a savers decision to save and where to savewhich organisation to go to. The competition will be between people paying 0.5 or 0.6 per cent. If someone is saving £25 a month and reaches £600 at the end of two years, I am told that the equivalent, expressing the bonus as the interest rate, is 44 per cent., so it really will not make much difference.

Mark Lyonette: I understand from a colleague that the argument raised this morning was in terms of the financial education benefit if people were to have an interest rate, but we do not think that is the way people save at all. We think that, for this marketplace, people are not motivated solely by the match or the interest rate. As Adrian has said, in this market, it is not going to be significant. We think you would lose an awful lot more by requiring it, not particularly because of the argument about cost structure, but because it would confuse people. We saw that with the child trust fund, when there were so many providers with different offerings. I know that it is a different product, at a different point in peoples lives, but part of the research showed that was because it was too hard to choose.
In our view, there are two different things going on: getting people into a savings habit is one thing, and getting them to a point where they can choose between savings products is another. Goodness knows, that is a lot more difficult than it was 20 years ago because of all the terms and conditions around savings products. They are two different stages, and the most important thing that this should hope to achieve is getting people into the habit. Once they are in the habit, after a couple of years, they might be in a much better position to think, Do I want to stay with this account, or do I go to this one because it will pay more interest? If you try to do both at the same time, people will turn away from it, as with the child trust fund.

Alan Cook: I endorse what Mark says. If you want mass-scale success, this needs to be as simple, straightforward and clear as possible. Everything that you have said supports that view.

Kevin Seller: The experience that we have had with the card account is that a lot of people use it to save, but there is no interest payable on it. I therefore agree with the others. The matching payment is likely to be more attractive than any level of interest we could pay.

David Taylor: We will move on to the operation of the accounts.

Q 60

Edward Timpson: Mark Hoban touched on the collection of savings. The proposal in the Bill is that the accounts will be cash-based, to the exclusion of equity investment. Is there is a case for equity investment being part of these types of account? If so, what would be the benefit of having that option available? That question is to everybody.

Adrian Coles: I would say that it would be inappropriate for low-income groups, probably without other savings, to be encouraged to invest in equities over a two-year period. I would think that cash is much more appropriate.

Alan Cook: I agree 100 per cent. To come back to my point about simplicity, that would introduce a raft of complexity and could undermine the Governments offer to produce a bonus at the end, because that could be swallowed up by a fall in equities.

Adrian Coles: I want to add one more point about equity accounts. The regulatory requirements on selling equity-based products are much greater, so you would be adding another layer of administrative complexity.

Helen Banks: I totally agree; it is not appropriate for the target market for these accounts. We are trying to teachthat is probably a bad word to useor to encourage people to put money to one side and to save for future shocks. I do not think that playing the stock market at the same time is the way to go.

Mark Lyonette: Adrian is absolutely right; it would not be good advice to tell people to take that kind of risk over two years. I think that it would also be met by peoples perception that, as we have seen with child trust funds, although you might be able to say that over any 18-year period it is always better to have used the stock market, that is not necessarily what people on low incomes want to do. They feel more comfortablefor good reason, as things have developedwith cash-based savings, whether or not they give the best economic return. All the other arguments are also sound.

Q 61

George Mudie: One of the issues thrown up by the pilot schemes was better-off people recycling their existing savings to get the match payment. The eligibility criteria include jobseekers, so they are not necessarily the people we have been speaking about so far. Do you think that this will be a problem?

Mark Lyonette: It is hard to say that it will not happen. I want to make two points. The Government have tried to design the scheme so that borrowing a substantial amount and loading your savings account in one go would not be worthwhile because you have to chip in so much each month. There is a maximum limit on that which will help. On the other hand, if a mum gives her daughter £10 a week to put in this account because she has put £25 in herself, is that fraud or is it a good thing because it encourages the saving habit? I am not answering the question, but asking one. Those sorts of things could happen.
I am also sure that if we designed a scheme for zero leakage, it would be disproportionately expensive for what it would save, and may put off all those hard working, honest people who think that this is a good thing to try to do. We must get the balance right. We must find the right cost to attach to the policing of the scheme that fits all the different needs.

Adrian Coles: I would have thought that if the interest rate is, in effect, 44 per cent., any decent financial journalist will write an article immediately telling people to take £25 a month out of their current savings account and put it into one of these accounts if they are eligible. I would have thought that that would be all over the financial pages of the newspapers.

Kevin Seller: I agree. The stakeholder pension bears that out. The people who are most financially savvy will be those who have money to spare. They will certainly make the best use of this.

Alan Cook: Although that is correct, I am a little closer to Marks view. It is a good investment trick to buy your wife a stakeholder pension if you are a high rate taxpayer. I do not know how marked that is. The eligibility criteria go a long way towards minimising that. As you say, there will be sectors that could be better off. Whether that is at the front of the minds of jobseekers is a moot point. It will certainly not stop the press from recommending it left, right and centre. Whether it happens in scale is a moot point.

Mark Lyonette: I am sure that you will want to ask the civil servants about that when you get to that stage. I am sure that they have done their homework on how many of the audience of 8 million who are eligible have savings that they can do this with. I hope that they have done their homework.

Adrian Coles: I suppose the other question is whether it is worth borrowing to invest in one of these accounts. Should you leave a bit of cash unpaid in your credit card account, which might attract interest at 19 per cent., so that you can make this months payment of £25 into your saving gateway account that will attract 44 per cent.? I do not know.

Mark Lyonette: You would have to work out that 19 per cent. over two years.

Adrian Coles: I know. Those are complex calculations.

Helen Banks: This is quite a bit better than being at university.

Adrian Coles: Yes, it can be very financially educational.

Q 62

Stephen Ladyman: I was going to ask for the answer to the question that Mark just asked. Of course financial journalists will immediately say that at this rate of return, people must shift money from their savings account into a gateway account. However, has this been designed so that very few people will be in the position of having such a level of savings? Have you made an estimate of the number of people?

Adrian Coles: I certainly have not.

Mark Lyonette: From our perspective, that is a big danger. Borrowing rather than transferring savings has a bigger risk. However, presumably the scheme has a certain monthly limit because civil servants have worked out that that is the point at which it would not be sensible borrow the money. For example, people could borrow £400 and try to keep it for 12 months while sticking £25 a month in the accounts.

Adrian Coles: It needs careful management.

Mark Lyonette: In a sense, I do not think that that is the providers responsibility. It is the designersthe Governmentsresponsibility.

David Taylor: You mentioned borrowing. I will bring in George because he is interested in that area.

Q 63

George Mudie: Robert Chote, who gave evidence to the Treasury Committeehe is a very awkward man who asks awkward question, and we are fed up with himsuggested that there was a risk that people would be tempted to borrow in order to save. Do you agree with that, and how would you mitigate against it? I told you that he was a bloody menace.

Adrian Coles: I think that there is a risk because the return is so fantastic44 per cent. a year is a wonderful return in the current environment of 1.5 per cent. bank base rates. It is very difficult for an institution to police where the customer gets the money from. How would you investigate that and work out where the £25 came from in one month, and how could you tell whether it came from a savings account or a credit card account if you are just paying cash or cheques into the saving gateway account?

Helen Banks: I agree. As a provider, that is a very difficult matter to deal with. I guess that it is about assessing the risk across the scheme and looking at what measures might be put in place and the cost of providing those measures to militate against that. As an individual provider, that would be very difficult to manage.

Mark Lyonette: For many of those people, their borrowing options might not be at the lowest mainstream rate and could be at several hundred per cent. You could do a calculation to see whether the home credit company, or whoever, might be lending you £20 a month to top that up. The important thing is not to lend it in a lump, but drip by drip. Would that still be worth your while to do? I think that it is much more likely to come from mum and that it will be lending without an interest rate that is part of that. However, is that necessarily a bad thing if at the end of it the daughter, who maybe did not save before, saves a little bit and sees the benefit of it. We have to see it in those terms. It cannot just be for the one-off payment at the end. The success of this has to be measured by whether people have begun to see a role for savings in their lives and continued to save. Surely that must be the criterion for success.

[John Bercow in the Chair]

John Bercow: Good afternoon, ladies and gentlemen. As you can see, there has been a change in the Chair, so I will do my best to keep up with the development of proceedings. I am John Bercow, the MP for Buckingham, and I am the co-Chairman of the Committee, along with my colleague, David Taylor.

Q 64

Stephen Ladyman: I want to come back to Mark. Do not most of your members save with credit unions precisely because their whole attraction is that you put a little bit of money away, establish that you can save, and are then able to borrow from someone who charges a reasonable level of interest, but who is not the tally man who breaks your arms if you cannot pay him back? Are not your customers exactly the ones who might be tempted to borrow something in order to save, as Mr. Mudie suggested?

Mark Lyonette: No, I do not think so. There is a certain irony in this for credit unions, as much of our experience of learning about savings has come from a period of time when credit unions did encourage people to save, not for the value of saving, but in order to be able to obtain credit. In a sense, it was a sort of arm twisting and a way of saying, If you save, we will potentially lend you some money. However, the learning that comes from that is that those people were not natural savers, but were saving in order to get credit, whether they were bus drivers or whoever. We might have 20,000 bus drivers in Britain who could, I suggest, have larger savings than many of us, not because they are natural savers, but because somehow someone persuaded them to part with it from their wages. Having done it, they think that it is fantastic.
I think that that is all coming back. I am as interested in the mechanisms, convenience and channels, to use the technical terms, as the match here, because what we have to work with is what drives peoples thinking on that. Personally, I do not think that it will be worth while to borrow in order to save, because the amounts of money we are talking about are small. Someone other than the providers, the Government presumably, should be satisfied and do some calculations on that before they launch it. I go back to what I said before: if that happens for a few basis points of the total population, what is the benefit of that versus designing a zero-tolerance system where it is not possible? Would that actually deter savings when there is a much bigger picture here? A balance has to be struck.

Q 65

Stephen Ladyman: I want to look at the question of penalties and appeals. I do not know how many of you have seen what is proposed in the Bill for a penalty that is improperly administeredI think that it is £300 or a pound per account. Do you think that is reasonable? Will it be a sufficient disincentive to encourage people to administer these accounts properly, or is it the sort of penalty that might put people off getting into the market?

Mark Lyonette: It is not something that ABCULthe trade associationhas taken a view on because the regulations are quite new. Again, I would say this issue is similar to the last question: what is the right level to set the penalties to disincentives the bad behaviour while hopefully encouraging good behaviour from the vast majority of people. Again, the level and terms of a penalty are not things the providers will be directly choosing or deciding; it will be part of the Government package.

Helen Banks: Are you also talking about the £300 penalty that I read will be imposed on an individual for making a false declaration?

Stephen Ladyman: Yes, that is an individual who is trying to cheat and have another one of these accounts. Particularly in your case, I am thinking about the penalty on providers.

Helen Banks: I did not think that the penalties on providers were unduly high. I was interested to see how that balanced against the penalty that was imposed on an individual for false declarations. You have to be careful where that is set when looking at the other potential for saving that is involved. We did not have any issues on that point.

Q 66

Stephen Ladyman: What about the situation where, for example, a bank decides it will go into this market and is trying to make the package look as attractive as possibleI am speaking hypothetically. Perhaps the bank tries to bundle something together with its basic account package and in doing that perhaps gets itself into trouble because it administers the scheme in a way that, technically, is breaking the rules and the regulations. Do you think that the process set out so far for appealing any charge put on that bank is reasonable? Do you feel that you would be able to make your case and defend yourself by saying that you were trying to do the right thing, even if it turned out that by accident you had done the wrong thing?

Helen Banks: I certainly feel that providers looking at this will consider very carefully how the information was provided to the consumerpotential account holderin the first place. Our members are particularly used to doing that under the terms of existing regulations, FSA requirements and so on. I did not think that that was a particular issue. The rules are there and the accounts will be provided in accordance with those rules.

Q 67

Stephen Ladyman: Just one further question on this issue. I have tabled an amendment today to explore this matter with the Minister later in Committee. On reading the Bill, it did not look to me as if the accounts would necessarily come under the FSA and therefore you would have no right of appeal to the Financial Ombudsman Service if you had been misled in some way. Do you think that ultimately you should be able to go to the Financial Ombudsman Service?

Adrian Coles: These are deposit accounts, are they not? I would have thought that they would come within the ombudsman.

Q 68

Stephen Ladyman: It is just that it is not specified in the Bill.

Mark Lyonette: All our discussions with the Treasury had assumed that that was definitely the case. It is important that these are not seen as stigmatised accounts without some of the benefits of recourse that other people would have. I would hope that both the regulation of the FSA and presumably the compensation schemethe FSCSand the ombudsman scheme would be available.

Adrian Coles: It would be very odd to sell these accounts with all of those things excluded.

Q 69

Stephen Ladyman: So, if the Minister confirms in the Committee that all those protections are there, none of you would have any objections?

Adrian Coles: We assume that they will be there.

Alan Cook: I am sure they would be. I should declare an interest, because I am on the board of the Financial Ombudsman Service, so I think it would be a jolly good idea.

John Bercow: At the risk of allowing levity to trump sobriety, I feel bound rather prosaicallyand from the point of view of some of you, probably boringlyto observe that at least three of you have names that add a particular piquancy to our proceedings. We have Banks, Seller and Cook. The other two can argue the toss as to the appropriateness of their names to the subject matter that we are considering, but it is all part of the sense of humour of the occasion. We will now proceed to Edward Timpson and then George Mudie.

Q 70

Edward Timpson: It is likely that when the take-up of this account starts to come to fruition, there will be different levels of financial understanding and acumen among the people who are opening the accounts. The pilots that have taken place have borne out some confusion among those who took part, as to exactly what will happen when they make repayments, or the timescales for repayments and withdrawals, and also on what happens when the account matures. Have you given it any thought, or is too early to say what type of mechanisms you will put in place to advise and provide guidance to account holders, to ensure that as part of their wish to embrace the savings culture, they actually understand the mechanisms for doing so?

Helen Banks: If I can answer that, our members have certainly given consideration to that aspect. We have also spoken to HBOS, which provided the pilot service, to understand its learning from carrying out those pilots. The need to spend sufficient time helping savers to understand how the account will work and what will what happen at the end of the account is an integral part of acting as a provider and, of course, it has to be taken into consideration when looking at the overall cost of providing these structures. Members have already considered what they would need to do, for example, to train people at branches, in way that is similar to that used now for basic bank accounts. Staff members are trained in how to deal with customers who approach them in that context and it would be a very similar role for this too.

Alan Cook: From the Post Offices perspective, we would have two types of branch. For the typical sub-Post Office, in a village or rural area, this is what they think that they were put on this planet do; to help their customers manage their daily lives. We would need to be really clear on the training. One of the biggest costs will be getting the training right, to make sure that they are giving the right informationadvice would be the wrong word.
Clearly, we would produce documentation, but it would be the conversation with the sub-postmaster that would produce the action. Kevin referred earlier to the Post Office card account; the benefits card. It was the actions of the sub-postmasters talking to their customers that resulted in 5 million people taking out one of those accounts. It is that community that we are talking to here, so we will put a lot of effort into it. That will be the primary activity. As I said earlier, there is the administration, which we have all talked about and highlighted but, although I would hesitate to call it the sales process, as that would be rather grandiose, the conversation that results in an individual taking out an account is really important and we put a lot of effort into it.

John Bercow: Thank you. Stephen, is it on this point?

Q 71

Stephen Ladyman: Yes, it is. It concerns the issue of advice, which we discussed in considerable depth this morning. The people who gave evidence were firm about the need for proper support and advice when choosing the appropriate product, but also at the end of the scheme, on what to do with the money; whether to put it into an ISA or something else. I thought that they were all a bit po-faced this morning. They all seemed to think that the purpose of saving was to save for a rainy day. I acknowledge that that is one of the reasons for saving, but the other reason for saving is to buy yourself something nice when you saved up for it.

Adrian Coles: Go on holiday.

Stephen Ladyman: Exactly. People borrow the money to buy themselves a pair of Jimmy Choose or whatever. But I do think that the witnesses were right in saying that these schemes will have to go hand in hand with proper advice and support to help people make the right decisions and benefit from them. One of you mentioned earlier that you are probably going to have to do that in partnership with somebody. What sort of partners were you thinking of that might provide this advice and support to people?

Mark Lyonette: Perhaps I can kick off. We certainly would expect to work with a number of our existing partners. Probably going on for a third of our members already have partnerships with people like Citizens Advice, and I know that you talked to them this morning. They certainly help people with budgeting and income maximisation and all those kinds of things. Whether they would be in a position to help them with anything approaching regulated financial advice, I do not think so in many cases. Similarly, social landlords have an interest in this largely because they are already one of the major sources of credit in the country, through rent arrears. They are keen to see the benefits of people having a little bit aside to protect against emergencies. I am not sure that the wider financial community, in terms of independent financial advisers, will get too involved in this process. I do not think that it would come across their radar. I am also not sure necessarily at the starting point how much advice people need.
It is not purchasing a product in the sense of parting with money that you have then lost. It is on the other side of the balance sheet, putting away £10 a month and seeing what happens after six months. To be honest, if people have not got the habit after two years, and if they have gone all the way to term with this and not realised that it is quite a good idea and that perhaps they should do it for Christmas as well, I am not sure that sitting down with a third sector intermediary will make a blind bit of difference. I am not entirely sure that there is a big package of encouragement to start this in that sense for the agencies. I am sure that the partners we have will work with us on it with general promotion and that kind of thing.

Adrian Coles: Yes. We must be careful not to suggest that too much advice is needed on this. That may put the customers off. It would also put the institutions off if they had to train their staff to too high a level for the amount of money involved.

Helen Banks: Although we are considering it as part of the overall provision of the account, our members would give guidance or information on an appropriate product for the money to go into at the end, if that is what the saver chooses to do. There should be some flexibility around the default optionwhether the money would automatically go into some form of savings accountand then it would be for the consumer to choose what to do with that money thereafter.

Kevin Seller: May I chip in? I am convinced that the process that we would follow in the Post Office would be that customers got a letter outlining their options and the first thing they would do is go down to the Post Office with that letter asking what to do about it. To emphasise Alans point, we have to get the training absolutely right when we get to that point in the process.

Q 72

George Mudie: This is a variation on that. Do you have an exit strategy thought out for individuals? In the Treasury Committee we have had terrible trouble with your industry in terms of basic bank accounts and getting people into a saving habit. You could get them to open basic bank accounts or even not so basic bank accounts. I get the impression that the Post Office is very keen to take the footprint because of its coverage, but would want the banks or building societies to administer it. Do you envisage them going into banks?

Helen Banks: I certainly think that providers would be looking at retaining the saving amount that had been built up and transferring it into an appropriate account from their suite of products. The difficulty is that there was some discussion in the early documentation about automatic roll-over into an ISA. Providers disagree about whether that is the appropriate route for the people in this category. The idea would be to set up a default account, which would be some form of savings account that is right for this market. The customer could then explore what other options might be available.

Q 73

George Mudie: Do your members welcome the prospect of this number of customers coming into the banks? They certainly did not with basic bank accounts.

Helen Banks: If they decide to act as providers of the account then that is obviously one of the things that they will be looking at very carefully.

Q 74

George Mudie: So they do not really, or you have not asked them yet. Is the number of basic bank accounts still growing?

Helen Banks: Yes, 50,000 accounts are being opened every month. To address some of your points, I am aware that issues were raised at an earlier stage about the hand-holding needed to encourage or help people in this sector to open accounts. A lot of work is going on at the moment as part of the work of the Financial Inclusion Taskforce. The banks have been working to produce some guidelines on how to make that whole process more acceptable from the consumers side, as well as from the banks side. Yes, we are aware that there were problems, and they have been addressed.

Q 75

George Mudie: Alan, do you have a tailor-made exit strategy for these new savers, to keep them coming in and being customers?

Alan Cook: I think that this will turn out to be the biggest feature of the scheme. We will be congratulating ourselves through the two years if there is a good take-up. What happens at the end of the two years is absolutely critical. I think it was Mark who said that it is not always the case that people have saved in order to investsorry, perhaps it was you, Dr. Ladymanbut it might be that there is a destination for this money which is not another savings account but a spend activity. It might be the holiday of a lifetime or something for the kids, who knows?
What is important is that the institution offering the saving gateway accounts has some options for the customer at the end of that. That is where the risk is. I do not think that one could be criticised for selling someone a saving gateway account when they are going to get such a handsome return at the end of it. You might be criticised for how you handle the saving gateway customer at the end of the period. As Kevin has already said, that is an area that we would focus on. We know full well that, whatever we put in writing, the customer will march straight back to the post office and talk to the individual behind the counter about what their options are.
There is going to have to be a default option of some sort, because many of these people will do nothing at the end of the two years. They will not seek to spend it or invest it, so we need to have a standard strategy, as we all will. The simpler and the more standard we can make it, the better.

Q 76

Stephen Ladyman: I asked earlier about paying interest on the account. It just occurred to me that one of the options at the end of the default might simply be that you start paying some interest on it. At least then, if the person does not move it, the money is not just sitting there doing nothing. Have any of you considered that?

Helen Banks: I am sorry if I did not make it clearthat was what I was trying to imply by saying that the money would move into an ordinary interest-bearing account.

Q 77

Stephen Ladyman: What happens if anyone puts more money into one of these accounts? By my reading of the Bill, that will be possible. If you put more money into this account than the Government will match, will that attract interest or will it sit there earning no interest? If it will, there may be a role for someone to say, There is no point putting in this level of money, because the Government will match £25 a month, but with £30 a month, you are better off putting the £5 somewhere else.

Helen Banks: Again, we have thought about that aspect. It is difficult to ensure that £25 a month and no more goes into an account. There would be exit strategies therefor example, the extra money could be transferred into a separate interest-bearing account, or returned to the customer. But that is something that would have to be worked out in detail.

Adrian Coles: On most regular schemes that the building societies offer at the moment, at the end of the saving period, the literature states that the money will be transferred into an instant access account from which the customer can withdraw their money when they feel that is appropriate. There is no loss thereit is virtually there as cash and the customer can just take the money out when they want. I would have thought that those building societies offering the account would pursue this option.

Alan Cook: May I make the additional observation that it is interesting that, as you get into this, the complexity comes out all over the place. If we do not fight the complexity, the scheme will not fly.

Q 78

Mark Hoban: May I go back to talk about ISAs and why they are not the right default option? My casual characterisation of an ISA would be that, on the whole, it pays a better rate of interest than most instant access accounts. If there was a default option, it would be much better for it to be an ISA because one would be saving at a higher rate of interest. Initially, it may be inconvenient to go into an ISA, but these people are on virtually no income and may not be paying any tax, so it is even better for them to go into an ISA because they will get a higher rate of interest, and they will receive it gross, rather than having to claim back the tax later.

Helen Banks: I am not suggesting that an ISA is not an option. Some may offer it, some may not. I guess we are thinking that people in this category are not going to get the tax benefits of an ISA, but it is appropriate to look at the interest rate that is available on whichever account is open to them.

Mark Lyonette: I would like to think that our membersit will be different for different memberswill offer the best alternative option in their wherewithal rather than the worst option. If they have a cash ISA available and it has the best rate, I should like to think that they would offer that. If they do not, and there is some other alternative share account or deposit account, I should like to think that they would offer the best product that they could find.

Adrian Coles: It is certainly good that the legislation allows one to break the usual ISA limit by adding this extra bit from the saving gateway. To make that mandatory, however, could preclude an institution offering a better account in some circumstances.

John Bercow: Thank you, Helen Banks, Adrian Coles, Mark Lyonette, Alan Cook, Kevin Sellerotherwise known as the fearless five, the fabulous five, the formidable fivefor sharing your time and expertise with us this afternoon and early evening. If hon. Members have no further questions, we have come to the end of our business for the day.

Ordered, That further consideration be now adjourned.(Mr. Blizzard.)

Adjourned till Tuesday 3 February at half-past Ten oclock.